Managing debt can feel overwhelming, especially when you’re juggling multiple debts with different interest rates…
Stuck Facing a Fixed Rate Cliff?
No one likes a cliffhanger. But, with 10 consecutive interest rate increases recently (as at 7th March 2023), borrowers in Australia with a fixed rate may face a sudden and significant increase in home loan repayments when their loan term finishes. An estimated $29.8 billion worth of fixed-rate mortgages expired in 2022, and by the end of 2023, that number is predicted to total $158 billion.1 These interest rate increases will hopefully be a good thing eventually. They increase in order to benefit our economy long term; keeping people employed and battling long-term inflation. But hearing this does not make it any easier to cope with an expiring fixed-rate home loan and an already tight budget due to inflation. While borrowers with a variable home loan have slowly been adjusting to paying the increasing rate, homeowners with a fixed rate may have to face a steep 3-4 increase in percentage points as soon as the fixed rate term is up.
Interest Rate Increases: What Happens Next?
If you are in the fixed interest rate party, wondering what mountain you are about to face, here is what may occur.
Once your fixed rate term is over, your mortgage should automatically change back to the standard variable rate that your lender offers. You may attempt to switch to a better rate with a different loan or lender. However, the rate will still most likely be far more than what you have been used to paying. If your debt-to-income ratio is high, then be aware that this may be a tricky time for you. Mortgage stress is a very real thing and can affect different parts of your life, especially the important parts, like relationships and mental health.
So, be realistic about your finances. If you are severely impacted by interest rates on the rise, do not wait it out. Speak to your mortgage broker or financial planner, who may advise you on ways to handle this, before you fall into the risk of falling behind on payments or even defaulting on your loan. There is often an achievable solution when speaking to the right people.
How Do I Face the Fixed Rate Cliff?
The Commonwealth bank forecasts that we could see rate cuts begin in November 2023; yet Westpac and ANZ say that rates will not drop until November 2024, and The National Australia Bank does not expect any cuts in the next two years, based on RateCity’s findings.
There are things you can do right away to tackle the rocky terrain of an impending “fixed rate cliff”. Firstly, you need to be ready for the expiration of your fixed rate and talk to your mortgage broker or adviser about what your strategy will be. Go over your budget and reassess your spending. Now is not the time for any unnecessary spending. You can also call your lender and negotiate a better deal on your new variable rate. Banks have special retention pricing to help retain their customers, so it is worth a try. You could also find out what your loan-to-value ratio is, and if you can get a discount because of it. Perhaps your equity has increased, helping you to work out a better deal. If you have trouble getting a competitive rate out of them, speak to your mortgage broker about switching to a new lender.
Can Refinancing Help with Interest Rates on the Rise?
While refinancing is not a magic solution to a steep rate increase, it may allow you more flexibility and control over your loan. Now may be the perfect time for borrowers with reverting fixed-rate loans to look around for a better deal, rather than wait for things to improve.
It is important to remember when you shop for a new loan that a competitive interest rate is not the only feature of a home loan to look at.
When you refinance, you can check out other lenders and see what terms and payment structures they can offer you, as well as any other fees they may or may not include. You may even be offered a cashback as an incentive for switching lenders. Speak to your mortgage broker to work out what new loan may suit you best.
Perhaps you intend on making some extra repayments and want to opt for a split loan (part fixed, part variable) this time around. Maybe you feel strongly about locking in your interest rate so you have some stability in your finances, then you may want a new fixed loan. Whatever situation you are in and goals you may have, speak to your mortgage broker to work out your next step.
Contact us
Call Watson Wealth today on (02) 4038 1623.
Disclaimer: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Licensing Statement: Credit Representative 525053 is authorised under Australian Credit Licence 389328.
[1] https://www.smh.com.au/money/investing/property-price-falls-may-be-bigger-than-expected-20220630-p5ay2n.html?cid=010507
[2] https://www.afr.com/property/residential/sydney-house-price-fall-nudges-20-per-cent-by-2023-anz-20220616-p5au71
[3] https://www.rba.gov.au/speeches/2022/sp-gov-2022-06-21.html?cid=010507
Disclaimer: The information provided in this fact sheet is not legal, taxation or financial planning advice. It has been prepared without considering your specific needs, objectives and personal financial situation. Before acting on this information, we recommend that you consider carefully if it is appropriate for your needs, objectives and personal financial situation. All loan products are subject to lender criteria and approval. Fees, terms and conditions apply. Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Licensing Statement: Watson Mortgages Pty Ltd Credit Representative 525053 is authorised under Australian Credit Licence 389328.
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